International BusinessClass 11 Business Studies NCERT Solutions
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Q1Long Answer Questions
"International business is more than international trade". Comment.
Solution
The statement "International business is more than international trade" is accurate. While people often use the terms interchangeably, international business is a much broader concept that encompasses international trade as just one of its components.
International trade specifically refers to the export and import of tangible goods, also known as merchandise, across national borders. For example, India exporting tea to the UK or importing electronics from Japan is international trade.
International business, on the other hand, includes all commercial transactions that take place between two or more countries. It is a comprehensive term that includes not only the trade of goods but also a wide variety of other cross-border activities. The major components that expand the scope of international business beyond trade are:
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Trade in Services (Invisible Trade): This involves the export and import of intangible services. It has grown substantially and includes sectors like tourism and travel, transportation, banking, insurance, communication, consultancy, and educational services. For instance, when a foreign tourist uses hotel services in India, it is an export of service for India.
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Licensing and Franchising: This is a mode of international business where a firm (licensor/franchiser) in one country grants permission to a firm in another country to use its intellectual property like patents, trademarks, or business model for a fee called royalty. Pepsi and Coca-Cola using local bottlers worldwide is an example of licensing, while McDonald's operating through local entrepreneurs is an example of franchising.
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Foreign Investments: This involves investing funds in foreign countries for a financial return. It takes two primary forms:
- Foreign Direct Investment (FDI): This involves direct investment in assets like plants and machinery in a foreign country to undertake production and marketing. An example is a foreign automobile company setting up a manufacturing plant in India.
- Portfolio Investment: This involves a company acquiring shares or providing loans to a foreign company to earn income through dividends or interest, without getting involved in its direct operations.
In conclusion, while international trade was historically the main form of international business, the modern global economy is characterized by a significant and growing volume of international service transactions, licensing, and capital flows. Therefore, international business is a far more inclusive concept that covers both the trade and production of goods and services across frontiers.
Q2Long Answer Questions
What benefits do firms derive by entering into international business?
Solution
Firms derive several significant benefits by entering into international business, which often lead to enhanced growth, profitability, and competitiveness. The key benefits are:
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Prospects for Higher Profits: International business can be more profitable than domestic business. Firms can earn higher profits by selling their products in countries where prices are high, especially when the domestic market offers lower prices due to factors like intense competition or market saturation.
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Increased Capacity Utilisation: Many firms set up production capacities that exceed the demand in their domestic market. By exploring overseas markets and securing orders from foreign customers, these firms can utilize their surplus production capacity. Operating on a larger scale can lead to economies of scale, which lowers the average cost of production and improves the per-unit profit margin.
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Prospects for Growth: When the demand for a firm's products begins to saturate in the domestic market, further growth becomes difficult. Entering overseas markets provides a significant opportunity for growth. This is a primary reason why many multinational corporations from developed countries have entered the markets of developing countries, where demand for their products is rising rapidly.
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Way Out to Intense Competition in Domestic Market: When the domestic market is highly competitive, it can be challenging for firms to grow or even survive. International business offers a way out by allowing firms to find new, less competitive markets for their products. This move can act as a catalyst for growth for firms facing tough market conditions at home.
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Improved Business Vision: Engaging in international business broadens a company's vision. The drive to become international stems from the urge to grow, the need to become more competitive, and the desire to diversify. This strategic move helps firms gain advantages of internationalisation and build a more resilient and globally-oriented business.
Q3Long Answer Questions
In what ways is exporting a better way of entering international markets than setting up wholly owned subsidiaries abroad.
Solution
Exporting is often considered a better initial way of entering international markets compared to setting up wholly owned subsidiaries, especially for small and medium-sized firms or those new to global business. The advantages of exporting over establishing a wholly owned subsidiary are primarily related to lower risk, investment, and complexity.
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Lower Financial Investment:
- Exporting: This mode requires minimal investment in foreign markets. The firm continues to produce in its home country and does not need to invest in setting up manufacturing plants, machinery, or distribution networks abroad.
- Wholly Owned Subsidiary: This requires the parent company to make a 100% equity investment in the foreign venture. It is a highly capital-intensive mode, making it unsuitable for firms with limited financial resources.
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Reduced Risk Exposure:
- Exporting: Since there is little to no foreign investment, the firm's exposure to financial and political risks is significantly lower. The main risk is non-payment by the importer, which can be mitigated through instruments like a letter of credit.
- Wholly Owned Subsidiary: The parent company bears the entire financial loss if the foreign operation fails. Furthermore, a 100% foreign-owned entity can be more vulnerable to political risks, such as expropriation or unfavourable policy changes in the host country.
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Ease and Simplicity of Entry:
- Exporting: It is the easiest and least complex way to enter an international market. The firm can start by dealing with overseas buyers directly or through intermediaries, without getting entangled in the complexities of managing a foreign operation.
- Wholly Owned Subsidiary: This involves complex legal and managerial challenges, including setting up a new company or acquiring an existing one, dealing with foreign regulations, and managing a workforce in a different cultural environment.
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Flexibility:
- Exporting: It offers greater flexibility. If a particular foreign market becomes unprofitable or risky, the firm can easily reduce or stop exporting to that country without incurring significant losses from sunk investments.
- Wholly Owned Subsidiary: Exiting a market is much more difficult and costly once a firm has established a subsidiary, as it involves liquidating substantial fixed assets and navigating legal procedures.
In conclusion, while a wholly owned subsidiary offers the benefit of full control, exporting is a superior entry strategy for firms seeking to test international markets with minimal commitment and risk.
Q4Long Answer Questions
Rekha Garments has received an order to export 2000 men's trousers to Swift Imports Ltd., located in Australia. Discuss the procedure that Rekha Garments would need to go through for executing the export order.
Solution
To execute the export order for 2000 men's trousers to Swift Imports Ltd. in Australia, Rekha Garments would need to follow a systematic export procedure. The key steps involved are:
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Assess Importer's Creditworthiness and Secure Payment: Since the order is already received, the first step is to ensure payment security. Rekha Garments should assess the creditworthiness of Swift Imports Ltd. and insist on obtaining a Letter of Credit from Swift Imports' bank. This will guarantee payment upon shipment.
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Obtain Export Licence: Rekha Garments must have the necessary licenses. This involves:
- Obtaining an Import Export Code (IEC) number from the Directorate General Foreign Trade (DGFT).
- Registering with the Apparel Export Promotion Council (AEPC) to get a Registration-cum-Membership Certificate (RCMC).
- Registering with the Export Credit and Guarantee Corporation (ECGC) to protect against non-payment risks.
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Obtain Pre-shipment Finance: With the confirmed order and letter of credit, Rekha Garments can approach its bank for pre-shipment finance to cover the costs of raw materials, manufacturing, and packing.
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Production of Goods: Rekha Garments will then proceed with manufacturing the 2000 men's trousers as per the specifications (quality, size, design) mentioned in the order.
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Pre-shipment Inspection: If required by the Australian government or Swift Imports, the consignment must undergo a quality inspection by a designated agency like the Export Inspection Agency (EIA). An inspection certificate will be issued upon successful inspection.
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Excise Clearance: Rekha Garments must apply to the Central Excise Commissioner for excise clearance. Since the goods are for export, they may be exempt from excise duty or be eligible for a refund later under the duty drawback scheme.
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Obtain Certificate of Origin: To avail any tariff concessions in Australia, Rekha Garments will need to obtain a certificate of origin from the local trade consulate, which proves the goods were manufactured in India.
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Reservation of Shipping Space and Insurance: The firm must book space on a ship bound for Australia and obtain a shipping order. It must also get the goods insured against transit risks (perils of the sea) with an insurance company.
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Packing, Marking, and Forwarding: The trousers will be properly packed and marked with details like the importer's address, port of destination, and country of origin. The cargo is then transported to the port of shipment.
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Customs Clearance: To get customs clearance, Rekha Garments (or its C&F agent) will prepare a shipping bill and submit it along with other documents like the export order, letter of credit, commercial invoice, and inspection certificate to the Customs House. After verification, customs will grant permission to export.
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Loading Goods and Obtaining Mate's Receipt: Once customs clearance is received, the goods are loaded onto the ship. The captain of the ship issues a mate's receipt as proof of loading.
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Obtain Bill of Lading and Prepare Invoice: The mate's receipt is submitted to the shipping company to get the Bill of Lading. Rekha Garments then prepares the final commercial invoice for the goods dispatched.
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Securing Payment: Finally, Rekha Garments will present the set of documents (bill of lading, invoice, insurance policy, etc.) along with the bill of exchange to its bank. The bank will forward these to the importer's bank in Australia, which will release the payment as per the terms of the letter of credit.
Q5Long Answer Questions
Your firm is planning to import textile machinery from Canada. Describe the procedure involved in importing.
Solution
If my firm plans to import textile machinery from Canada, it would need to follow a series of steps to ensure the transaction is completed legally and efficiently. The import procedure would be as follows:
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Trade Enquiry: The first step is to identify potential suppliers in Canada and send them a trade enquiry. This enquiry will request information about the machinery's specifications, price, and terms of delivery and payment. The Canadian exporter will respond with a quotation, also known as a proforma invoice.
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Procurement of Import Licence: My firm must check the current Export-Import (EXIM) policy of India to determine if an import licence is required for textile machinery. Even if it is freely importable, the firm must have an Import Export Code (IEC) number issued by the DGFT.
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Obtaining Foreign Exchange: Payment to the Canadian supplier will have to be made in foreign currency (Canadian Dollars). My firm will need to apply to a bank authorized by the Reserve Bank of India (RBI) to get the necessary foreign exchange sanctioned for the import.
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Placing an Order (Indent): After settling the terms, my firm will place a formal import order, or indent, with the Canadian supplier. This document will detail the quantity, quality, and price of the machinery, along with instructions for packing, shipping, insurance, and payment.
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Obtaining a Letter of Credit: To assure the Canadian exporter of payment, my firm will arrange for its bank to issue a Letter of Credit (L/C) in favour of the exporter. This L/C acts as a guarantee of payment from our bank.
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Arranging for Finance: My firm must make financial arrangements in advance to ensure funds are available to pay the exporter and cover other costs like customs duty and freight charges upon the machinery's arrival.
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Receipt of Shipment Advice: After shipping the machinery, the Canadian supplier will send a shipment advice. This document will contain details like the invoice number, bill of lading number, name of the vessel, and date of sailing.
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Retirement of Import Documents: The Canadian supplier will send a set of documents (including the bill of lading, commercial invoice, and bill of exchange) through their bank to my firm's bank. My firm will have to 'retire' these documents by either making the payment (for a sight draft) or accepting the bill of exchange (for a usance draft). The bank will then hand over the documents, which are needed to claim the machinery.
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Arrival of Goods: When the ship carrying the machinery arrives at the Indian port, the captain will provide an import general manifest to the port authorities, which details the cargo.
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Customs Clearance and Release: This is a critical final stage, often handled by a Clearing and Forwarding (C&F) agent. The steps include:
- Obtaining a delivery order from the shipping company.
- Paying dock dues and getting a port trust dues receipt.
- Filing a Bill of Entry with the customs office for assessment of customs duty.
- Paying the assessed import duty.
- Presenting the duty-paid bill of entry to the port authorities to get a release order and finally take delivery of the textile machinery.
Q6Long Answer Questions
What is IMF? Discuss its various objectives and functions.
Solution
The information required to provide a detailed answer on the objectives and functions of the International Monetary Fund (IMF) is not available in the provided source text. The text mentions the IMF only in the context of India approaching it in 1991 to manage its balance of payment crisis, which led to the liberalisation of India's economic policies.
Q7Long Answer Questions
Write a detailed note on features, structure, objectives and functioning of WTO.
Solution
The information required to write a detailed note on the features, structure, objectives, and functioning of the World Trade Organisation (WTO) is not available in the provided source text. The text only mentions the WTO as a contributory factor to increased interactions and business relations among nations.
Q1Short Answer Questions
Differentiate between international trade and international business.
Solution
International trade and international business are related but distinct concepts. The key differences are as follows:
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Scope: International business is a much broader term than international trade. International trade, which involves the export and import of tangible goods (also known as merchandise), is only one part of international business.
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Components:
- International Trade: Primarily includes the movement of physical goods across national borders.
- International Business: Encompasses a wider range of activities. Besides merchandise trade, it includes:
- Trade in Services (Invisible Trade): International transactions related to services like tourism, transportation, banking, insurance, and communication.
- Licensing and Franchising: Permitting a foreign firm to use patents, trademarks, or business systems for a fee (e.g., Pepsi and McDonald's).
- Foreign Investments: Investing funds abroad, which can be Foreign Direct Investment (FDI) like setting up a factory, or Portfolio Investment like buying shares in a foreign company.
In essence, international trade focuses on the exchange of products, while international business covers all commercial activities, including trade, services, and investments, that take place across national frontiers.
Q2Short Answer Questions
Discuss any three advantages of international business.
Solution
Three major advantages of international business are:
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Earning of Foreign Exchange (Benefit to Nation): International business helps a country earn valuable foreign exchange. This foreign currency is essential for importing capital goods, advanced technology, petroleum products, and other essential items that may not be available domestically. A strong reserve of foreign exchange contributes to the economic stability of a nation.
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Prospects for Higher Profits (Benefit to Firms): Firms can often earn higher profits by operating internationally than by confining themselves to the domestic market. If domestic prices are low due to intense competition or other factors, firms can sell their products in foreign markets where prices are higher, thereby increasing their profit margins.
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Improving Growth Prospects and Employment Potentials (Benefit to Nation): Relying solely on the domestic market can limit a country's growth. By tapping into foreign markets, countries can produce on a larger scale. This strategy of 'export and flourish' leads to economic growth, better utilisation of resources, and the creation of more employment opportunities for its citizens, as seen in countries like Singapore and South Korea.
Q3Short Answer Questions
What is the major reason underlying trade between nations?
Solution
The major reason underlying trade between nations is that countries cannot produce all the goods and services they need equally well or cheaply. This is due to the unequal distribution of natural resources and differences in productivity levels among them.
Key factors contributing to this are:
- Unequal Distribution of Resources: Factors of production like labour, capital, and raw materials are not evenly distributed across the globe. Some countries are rich in certain resources while lacking others.
- Differences in Productivity: Due to various socio-economic, geographical, and political reasons, labour productivity and production costs differ significantly from one nation to another.
As a result, some countries have an advantageous position in producing certain goods more efficiently and at a lower cost. This leads to the principle of geographical specialisation, where each country focuses on producing what it does best and trades its surplus with other nations to procure what they produce more efficiently. This specialisation and trade benefit all participating countries by increasing the overall availability of goods and services.
Q4Short Answer Questions
Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.
Solution
Contract manufacturing and setting up a wholly owned subsidiary are two different modes of entering international business. The key differences are as follows:
| Basis | Contract Manufacturing | Wholly Owned Subsidiary |
|---|---|---|
| Ownership & Control | The international firm does not own the production facility. It enters a contract with a local manufacturer. Control is limited to the specifications of the contract. | The parent company has 100% ownership of the foreign facility. It exercises full control over its overseas operations. |
| Investment | It requires little to no direct investment in setting up production facilities abroad, as the firm uses existing local facilities. | It requires a 100% equity investment in the foreign subsidiary, which involves a substantial financial commitment. |
| Risk | Financial risk is very low or nil, as no significant investment is made in the foreign country. The parent company is also shielded from political risks associated with ownership. | The parent company bears 100% of the financial risk and losses if the foreign operation fails. It is also more exposed to political risks. |
| Technology Disclosure | The international firm has to share its technology and product specifications with the local manufacturer, risking that trade secrets may be leaked. | The parent company is not required to disclose its technology or trade secrets to any outside party, ensuring they remain protected. |
| Suitability | It is suitable for firms that want to enter foreign markets with minimal investment and risk, or for outsourcing non-core production activities. | It is preferred by companies that want to maintain full control over their technology and operations and have sufficient funds to invest abroad. |
Q5Short Answer Questions
Why is it necessary for an export firm to go in for pre-shipment inspection?
Solution
It is necessary for an export firm to go in for pre-shipment inspection for the following reasons:
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Quality Assurance: The primary purpose of pre-shipment inspection is to ensure that only good quality products are exported from the country. This helps in maintaining the reputation of both the exporter and the country in the international market.
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Government Regulation: The Government of India, under the Export (Quality Control and Inspection) Act, 1963, has made inspection compulsory for certain categories of products. Exporters of these notified products must comply with this legal requirement to be able to export.
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Importer's Requirement: Many importers insist on an inspection certificate as a condition of the sales contract to be assured of the quality of goods they are purchasing. It acts as a third-party verification of the product quality before it is dispatched.
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Customs Clearance: The inspection certificate issued by the Export Inspection Agency (EIA) or another designated agency is a necessary document that must be submitted to customs authorities for obtaining clearance for the export consignment.
Q6Short Answer Questions
What is bill of lading? How does it differ from bill of entry?
Solution
A bill of lading is a crucial document in export transactions. It is issued by the shipping company or its agent to the exporter after the goods have been loaded onto the ship. It serves three main purposes:
- It is an official receipt confirming that the shipping company has accepted the goods for carriage.
- It is evidence of the contract of shipment between the exporter and the shipping company.
- It is a document of title to the goods, meaning the holder of the bill of lading has the right to take possession of the goods. It is transferable by endorsement and delivery.
A bill of entry is a key document used in import transactions. It is a form supplied by the customs office that the importer must fill out at the time of receiving the goods. It is submitted to the customs authorities for the assessment of customs duty and for getting clearance to take the goods out of the port or airport.
The main differences between a bill of lading and a bill of entry are:
| Basis of Difference | Bill of Lading | Bill of Entry |
|---|---|---|
| Transaction Type | Used in an export transaction. | Used in an import transaction. |
| Issuer | Issued by the shipping company. | Prepared by the importer and submitted to the customs office. |
| Purpose | Serves as a receipt for goods, a contract of carriage, and a document of title. | Used for customs clearance and assessment of import duty. |
| Content | Contains details of goods, vessel name, port of loading and destination, and terms of transport. | Contains details of the importer, exporter, vessel, quantity, value of goods, and customs duty payable. |
Q7Short Answer Questions
What is a letter of credit? Why does an exporter need this document?
Solution
A letter of credit (L/C) is a guarantee issued by the importer's bank, in which the bank undertakes to honour payment up to a certain amount of export bills to the exporter's bank. It is a commitment by the bank on behalf of the buyer (importer) that payment will be made to the seller (exporter), provided the terms and conditions stated in the L/C have been met, as verified through the presentation of specified documents.
An exporter needs this document for the following crucial reasons:
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Security of Payment: The primary reason is to minimize the risk of non-payment. In international business, the exporter and importer are often strangers located in different countries, making it difficult to assess the importer's creditworthiness. A letter of credit shifts the payment risk from the importer to the importer's bank, which is a more reliable and secure arrangement.
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Mitigation of Commercial and Political Risks: It protects the exporter from the commercial risk of the importer's insolvency and the political risks in the importer's country that might prevent payment.
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Basis for Pre-shipment Finance: Once an exporter has a confirmed order backed by a letter of credit, it becomes easier to obtain pre-shipment finance from their own bank to procure raw materials and manufacture the goods for export.
Q8Short Answer Questions
Discuss the process involved in securing payment for exports.
Solution
The process of securing payment for exports is a critical final step in an export transaction. It typically involves the following stages:
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Preparation of Documents: After the shipment of goods, the exporter prepares an invoice and collects all other necessary documents required by the importer to claim the title of goods. These documents usually include the bill of lading (or airway bill), marine insurance policy, certificate of origin, packing list, and commercial invoice.
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Drawing a Bill of Exchange: The exporter draws a bill of exchange on the importer. This is an order instructing the importer to pay a specified amount of money either immediately (a 'sight draft') or at a future date (a 'usance draft').
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Negotiation of Documents: The exporter submits all these documents, including the bill of exchange, to their bank. This process is called 'negotiation of the documents'. The exporter's bank is instructed to deliver the documents to the importer only after the conditions of the bill of exchange are met.
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Dispatch of Documents to Importer's Bank: The exporter's bank forwards the documents to the importer's bank in the foreign country.
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Payment by Importer: The importer's bank informs the importer about the arrival of the documents.
- In the case of a sight draft, the importer must make the payment immediately to the bank to receive the documents.
- In the case of a usance draft, the importer 'accepts' the bill of exchange (by signing it), promising to pay on the specified future date. The documents are then released to the importer.
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Remittance of Funds: Once the importer's bank receives the payment, it transfers the funds to the exporter's bank, which then credits the amount to the exporter's account. The exporter then needs to obtain a Bank Certificate of Payment, which confirms that the payment has been received in accordance with foreign exchange regulations.